A view from the bunker on bonds 12-22-98

CBS.MarketWatch.com

LAS VEGAS (CBS.MW) --If you're sitting in sunny Las Vegas, surrounded by the palaces Bellagio and Venetian, you're about as far removed from the world economy as you can get.

So what is fund manager Chris Bunker, whose family founded nearby Bunkerville, doing these days? Keeping a close eye on the world economy. "I see a fiscal bomb going off in South America," says Bunker.

Bunker handles $450 million, 90 percent of it for Clark County, which has about $2 billion under management. Bunker's Nevada Institutional Investors is Clark County's only outside fund manager, he says.

Bunker says he's getting "pretty bulled up on bonds." Those are strong words in a world where Internet and personal computer stocks are raging.

Bunker, who recently struck out on his own after working as a portfolio manager for Clark County for six years, owns a simple view of life. He's lived in Clark County his entire life.

He understands emerging market debt. And he asks the question: If Russia, which is responsible for about a half-percent of the U.S. gross domestic product, can spark a worldwide fire-sale of most investments, save for U.S. Treasury bonds, what will happen when Brazil or Venezuela follow suit?

U.S. exports to Brazil, after all, have about doubled in the past four years. Brazil's emerging market debt is often used as a benchmark for other nations' fledgling debt issues.

Bunker sees the benchmark U.S. Treasury bond yield ($TYX)
TYX, -0.93%
declining to 4 percent in the next year or so from the current 5 percent. The Federal Reserve's Federal Open Market Committee met Tuesday and left U.S. interest rates unchanged. See FOMC story.

Very few economists expected Alan Greenspan's Fed to reduce interest rates -- not after the central bankers reduced rates three times during a seven-week period beginning Sept. 29 and revived world markets.

Now, the International Monetary Fund sees world growth in 1999 at just 2.2 percent, matching expected output for this year. That's the lamest world growth rate since a 1.8 percent increase in 1991, when the United States was emerging from its last recession. See IMF story.

Bunker sees rocky road

Bunker says slow growth and rocky currency markets will pin South American nations to the fiscal mat. That scenario, a reprise of this past summer, will send money flooding into U.S. Treasury bonds.

In the meantime, Bunker plays the spread between Treasury yields and agency bonds. The Fannie Maes and Freddie Macs of the world have been engineering large global issues worth billions of dollars.

"We've seen spreads get real attractive between the benchmark Treasurys and the agencies," he says.

Spreads are a measure of risk. Greater spreads indicate greater risk. That's because bonds perceived as riskier than Treasury bonds must offer higher yields to attract investors. What's more, money flooding into the safety of Treasury bonds sends those yields lower, widening the spreads still further. That's a double whammy.

Right now, the spreads between agency issues of 2 years and 3 years and Treasury issues of the same time spans are 35 to 40 basis points.

Three months ago, when the world went to heck in a handbasket, the spread was 70 basis points. "The agencies don't track the Treasury market dollar for dollar," Bunker says. "I like to take advantage of that."

And hey, how 'bout those 'Net stocks?

What if world markets melt again and a 40-point spread goes to 70 points, then 100 points? (A hundred basis points equals a full percentage point.)

"If you buy (an agency bond) with a 70-point spread and it goes to 120, you have to say go ahead and buy more, no matter what happens in Brazil. Agency bonds are a good credit, and you have to know that Freddie Mac is issuing debt to build homes, as it always has."

I couldn't let a fixed-income portfolio manager leave without a question from left field: Hey, what do you think about those Internet stocks, Chris? The group was up 11 percent in a day this week.

For those who think Internet stocks will lose their bullheaded momentum, witness shares of Web merchant iMall (IMALL)
imal
, which Tuesday rose 135 percent. Reason: an alliance with AT&T.

In the U.S. stock market, Internet-enabled investors are said to account for as much as 25 percent of all trades, according to some estimates. Ho-hum, says Bunker.

"The stock market is a total crap shoot, unless you can stand a very macro view of things, saying I am just going to invest in equities," Bunker says.

"Internet stocks have had amazing performance," he says. "But take a Warren Buffet perspective. What are you buying? They are total speculative trades. Sure, it's the wave of the future."

Final advice: "For myself, if it's money you can afford to lose, sure, take a shot."

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